Will the Incredible Shrinking US Workforce Ever Rebound?

The US is a country whose population is growing and whose citizens have long been known for their obsessive preference for working over more salubrious forms of human activity.

It is odd, therefore, that the numbers comprising the US work force, those considered able and willing to hold a job, perform a task for which they are paid or otherwise capable of earning a living, have shrunk over the past few years.

In December 2012, the number of Americans either working or looking for work shrank to 62.8 percent of the total, the lowest number since 1977, over 35 years ago.

It is not as if the amounts of money and scale of public programs to support them have grown. Those have been cut back harshly, most recently last year when unemployment benefit extensions were rejected. Nor is the availability of generous pensions likely to be the answer: most of those were eliminated in the rush to become 'globally competitive' starting in the 1980s.

The two reasons most often cited for the decrease are either the long-awaited retirement of the Baby Boomer generation or the fact that many people have just given up. As the following article explains, the answer is complicated because the data are not crystal clear. But it is increasingly apparent that both contribute to the trend, despite the fact that the Boomers are not as well-off on relative basis as were their parents due to the impact of inflation on the cost of living.

The predominant driver of this behavior has been the impact of the financial crisis and recession. There are simply not enough jobs outside of the lower end service sector and so many people have simply given up looking for work that is consistent with their education, experience or expectations.

While moralists may decry the the ideological roots of those making this decision to withdraw, pragmatists are more understanding of the basis for what may be a rational act. They are focused, as a result, on the implications for the future. Their concern is that many of those who have ceased looking are consuming capital inherited from their forebears which, rather than being spent to fund daily living, in better times might have been invested in new enterprises funded through public markets or privately through desire to help friends and family.

Perhaps most worrisome is the belief that labor participation will not recover because the economy's capacity to generate jobs will never catch up to the demographic trend. What this means is that in the misbegotten desire to impose 'discipline' and 'rigor' this society may have created a self perpetuating economic trauma whose resolution is not currently foreseeable. JL

Binyamin Appelbaum reports in the Economix blog:

People keep leaving the labor force. The share of Americans either working or looking for work sank to 62.8 percent in December, tying October for the lowest level since 1977 – an era when women were much less likely to work

One explanation is that baby boomers are shuffling into retirement. The trend is demographic rather than economic. People are not working because they are old.

Another explanation is that people have abandoned hope of finding jobs.

Both explanations are true for some people. What we don’t know are the proportions. We don’t know how many of the people who have stopped looking for work might want to return to the ranks of working adults as the economy rebounds.

Economic forecasts from before the recession are a potentially valuable source of insight. The demographic trends, after all, were relatively easy to predict. The number of baby boomers is stable – or at any rate, it does not increase.

It is therefore striking that in 2005, when the labor force participation rate stood at 66 percent, the Bureau of Labor Statistics predicted that the rate would fall only a bit to 65.6 percent by 2014 – far above the current rate of 62.8 percent.

Recent studies, including a much-discussed paper by a pair of Federal Reserve economists working at the International Monetary Fund, have similarly concluded that the recession is the primary cause of the decline in the labor force.

As is often the case in economics, however, the truth has proven elusive.

Some economists did predict that demographics would produce a decline like the one we have seen. Notably, a 2006 paper by a different group of Fed economists predicted that labor force participation would fall to 62.9 percent in 2014.

And a competing set of recent studies has found validation for these predictions in the latest data. According to an analysis by Shigeru Fujita, an economist at the Federal Reserve Bank of Philadelphia, the aging of the American population accounts for about two-thirds of the decline in labor force participation since 2000.

Why are answers so hard to find? In part because the data is subject to multiple interpretations. Those who say they’ve retired may mean that they never want to work again, or they may be taking shelter in the dignity of retirement because they can’t find work – and they might be willing, even eager, to reconsider.

The Fed, in theory, could determine the answer by stimulating the economy until the participation rate stops rising. But the Fed is not going to do that, because officials believe that pushing unemployment below a certain level, known as the “natural rate,” will cause inflation to increase. Instead, they will set policy based on a best guess about the share of people who might return to the work force.

It is quite likely the argument will therefore be resolved by default.

A sobering piece of economic modeling by the St. Louis firm Macroeconomic Advisers, published last summer, concluded that the participation rate was not likely to rebound because the damage done by the recession would not be reversed quickly enough to keep ahead of the long-term demographic trends.

Decisions made for economic reasons have a way of hardening into demographic facts. Those who announce that they are retired are less likely to return to the labor force. People who qualify for disability benefits rarely return to work. And baby boomers keep getting older. As time goes by, many of those people who might have returned to the work force will become people who never did.